What you need to know about Secure Act 2.0: 401(k) and IRA changes

A series of new laws — collectively known as the Secure Act 2.0 — will change the way Americans save for retirement starting in 2023. They are part of the $1.7 trillion spending bill passed by Congress late last week and include raising the age of required minimum distributions (RMDs), which allow unused 529 funds (tax-deferred savings plan for tuition) into a retirement account at no charge, and make it easier for workers with student loans to save for retirement.

“With the passage of SECURE 2.0, millions more Americans now have a better chance of a successful retirement,” said John James, head of the Vanguard Institutional Investor Group. “This landmark legislation makes it easier for participants to save for their future.”

The legislation includes dozens of pension changes, according to the text of the law, summaries of regulations and insights from pension and financial experts. Here’s an overview of some of the key 401(k), 403(b), and IRA improvements.

Changes to RMDs

Currently, taxpayers must start withdrawing RMDs from their retirement accounts at age 72. However, by 2023, that age will rise to 73. In 2033, the age will rise to 75.

That means if you turn 72 in 2022, you must take your first RMD by April 1, 2023; However, if you turn 72 in 2023, you won’t need to take your RMD until the following year, when you turn 73. This will move the deadline for your first payout to April 1, 2025 (since your first RMD is for 2024). ).

Another RMD change: The penalty for missing RMDs is reduced from 50% of the payout amount to 25%. It drops to 10% if the RMD is taken by the end of next year.

And from 2024, a surviving spouse who inherits a retirement account will be treated as a deceased account holder for RMD purposes. This means if the surviving spouse is younger than their deceased spouse, they may be able to delay RMDs.

Finally, while there are currently no RMDs for Roth IRAs, there are required distributions for Roth 401(k)s. With the Secure Act 2.0, these will no longer apply for account holders who are still alive.

Increased catch-up contributions

Another blessing for older workers: They can save even more in retirement accounts.

Currently, people over 50 can invest $7,500 in what is called a catch-up contribution in addition to their 401(k) or 403(b). This amount will increase to $10,000 for those aged 60-63 from 2025.

In addition, starting in 2024, the IRA’s inflation catch-up limit will increase each year. It’s currently a flat rate of $1,000 per year.

Catching up on Roth contributions

Under applicable law, margin contributions to qualifying retirement plans may be made on a pre-tax or Roth (post-tax) basis. Legislation changes that for higher-earning workers: For those earning at least $145,000, all catch-up contributions will be subject to Roth tax treatment beginning in 2024.

“Congress wants more retirement money going into Roth accounts because they increase tax revenue since there are no tax deductions for Roth contributions,” says Ed Slott, a CPA and IRA specialist. “But that’s great for people because Roth dividends in retirement are tax-free.”

Roth 401(k) Compliance

Under current law, if an employer offers a pension adjustment, it must allocate it to a traditional 401(k) on a pre-tax basis, even if the employee has a Roth 401(k). The new law adjusts this so that employers can offer Roth appropriate contributions. Like other Roth contributions, employees pay their Roth allowance upfront and can later take it out tax-free.

401(k) savings accounts

Employers can now automatically enroll their employees in savings accounts linked to their 401(k)s. Studies have shown that automatic registration increases participation rates – and total savings. You can also supplement emergency savings, although the supplement would come in the form of a retirement account contribution.

Employees earning less than $150,000 as of 2023 qualify for these accounts and can save up to $2,500. Saving works like a Roth deposit (or deposit into a regular savings account): Employees contribute money that has already been taxed and can withdraw it tax-free. When an employee reaches this $2,500 cap, any additional contributions are diverted to a Roth account.

“The SECURE Act is more focused on emergency savings than any previous legislation we’ve seen,” says Jeff Kobs, head of John Hancock Retirement’s Business Consulting Group. “Recent years have really shown that providing a way to save for emergencies can prevent individuals from having to draw on their long-term retirement savings to meet short-term needs.”

Emergency 401(k) and IRA withdrawals

The legislation will make it easier for workers to withdraw funds from their retirement accounts without penalty in the event of personal or family emergencies, such as a terminal illness or natural disaster.

Beginning in 2024, an emergency distribution of up to $1,000 will be allowed each year. If the taxpayer doesn’t pay back that $1,000 in three years, they can’t make another distribution during that time.

“While these are all critical issues, early withdrawal from a retirement account should be the last resort, and now tax law has more impunity than ever,” says Slott. “It’s a difficult decision. Hopefully people will only use these funds for real emergencies and they will continue to owe the tax on the distribution.”

Additionally, starting in 2024, survivors of domestic violence will be able to withdraw $10,000 or 50% of their retirement account with no penalty, whichever is less. They have three years to pay them back, and if they do, they will be refunded the income tax they paid when they were withdrawn.

401(k) automatic login

Speaking of automatic enrollment, the legislation requires employers beginning new retirement plans in 2025 or later to automatically enroll their employees in a 401(k) and 403(b) plan. Automatic enrollment starts at 3% of the employee’s salary and cannot exceed 10%. The contribution will automatically increase by 1% each year.

Student Loan Payment Match

Workers who have student debt often forgo contributions to their retirement accounts to meet their monthly loan payment. And when their employer offers a 401(k) match, it means they’re missing out on that money — effectively taking a pay cut and reducing the time they invest in retirement, sometimes by a decade or more.

The Secure Act 2.0 allows employers to make matching contributions to a retirement account for employees making student loan payments even if they don’t contribute to their 401(k)s. The match would mirror a retirement match, allowing these borrowers to start saving for retirement while also paying off their debt.

This also applies to those with 403(b)s, 457(b)s, and SIMPLE IRAs.

Rollover 529 funds

If a family has leftover funds in a 529 account that they are not using for educational purposes, they are subject to a penalty to withdraw those funds. As of 2024, the Secure Act 2.0 will allow beneficiaries of 529 accounts to put up to $35,000 (in lifetime) into a Roth IRA. The 529 must have been open for at least 15 years for a beneficiary to do so.

The rollover amount is subject to the annual contribution limit for Roth IRAs, so some individuals may need to plan to roll over their funds over several years.

“While there aren’t millions of people who overfund 529 plans, it gives parents and grandparents who fund a 529 peace of mind that the money for their children or grandchildren can be reallocated to retirement plans if their 529 beneficiary switches to a 529.” going to cheaper school, getting a scholarship or not going to college,” said Jamie Hopkins, managing partner of Wealth Solutions at Carson Group.

National 401(k) registry

Finally, the bill will create a national lost-and-found office for 401(k)s. Currently, states operate their own versions, causing confusion for many workers.

“It can be almost impossible to find your money if it’s lost or forgotten because the money may not be in the state where you live or where your employer was located, but where the plan provider was located.” ‘ says Hopkins. “A national directory will be beneficial for consumers.”

The database will be searchable online, allowing employees to search for their plan administrator.